Coal Imports by China May Fall as Discount Narrows by 47%: Energy Markets

By Bloomberg News -
Jul 5, 2010

China, which became a net coal
importer in 2009, may cut overseas purchases after the discount
on shipments from South Africa compared with domestic supplies
narrowed 47 percent in a year.

The world’s fastest-growing economy bought 126 million tons
from overseas last year as demand from steelmakers and power
producers soared, according to Chinese customs data. Now, power
use is declining and the government has imposed price caps on
local mines. China may require fewer shipments, threatening this
year’s 33 percent jump in spot prices at the port of Qinhuangdao.

The discount on coal from South Africa’s Richards Bay, the
world’s second-biggest exporting harbor, and Chinese supplies
has narrowed to $19 a ton before shipping costs are taken into
account, government data show. That compares with $36 a ton less
than a year ago.

“China right now looks to be more bearish than bullish,”
Richard Morse, who leads coal-market research at Stanford
University at Stanford, California, said in an interview.
“Lower domestic prices are bearish for imports.”

The spot price for coal at Qinhuangdao, China’s biggest
port for the fuel, was $111.48 a ton as of June 28, compared
with $83.79 a year earlier, according to the China Coal
Transport and Distribution Association. Prices averaged $109.26
a ton in 2009. Coal at Richards Bay was $91.51 on June 25,
compared with an average of $73.10 last year, according to an
index compiled by IHS McCloskey.

Inventories carried by Chinese utilities rose to the
equivalent of 18 days of consumption compared with seven days
two months earlier, Australia and New Zealand Banking Group Ltd.
said in an e-mailed note.

Shipping Rates

A slide in imports is likely to hurt producers in South
Africa, Colombia, the U.S. and Canada, which boosted sales of
thermal and steelmaking coal to Asia just as the global
recession curbed demand elsewhere. The four countries accounted
for 11 percent of China’s supplies in the five months through
May, compared with 3.7 percent in 2009.

Benchmark European coal derivatives fell the most in more
than a week on July 2, with prices for delivery to Amsterdam,
Rotterdam or Antwerp with settlement next year falling 2.2
percent to $99 a ton. Prices at Australia’s Newcastle, the
world’s largest export harbor for the fuel, dropped 3.1 percent
to $97.31 in the week to June 25.

The slowdown in China’s imports may also deepen the slump
in shipping rates. The Baltic Dry Index, a gauge of commodity-
transport prices, fell for a 26th day on July 2, extending its
longest slide since August 2005, data from the Baltic Exchange
in London showed.

To help curb inflation, China’s National Development and
Reform Commission ordered coal companies on June 25 to refrain
from spot-price increases and forbade them from amending
agreements on annual supply contracts with power producers.
Consumer prices rose 3.1 percent in May from a year earlier,
exceeding the government’s 3 percent target average for 2010.

‘Risk of Losses’

“The new controls appear designed to manage inflationary
expectations and to discourage coalminers from exacting higher-
than-contracted prices from power producers that stand at risk
of incurring losses this year,” said Jing Ulrich, chairwoman
for China equities and commodities at JPMorgan Chase & Co. in
Hong Kong.

China’s efforts to keep the economy from overheating may be
working. The U.S. Conference Board last week revised its leading
economic index for China to show the smallest gain in five
months in April. Goldman Sachs Group Inc. cut its 2010 growth
forecast to 10.1 percent from 11.4 percent.

The economy expanded 10.7 percent in 2009. It will grow
9.25 percent this year, according to the median in a Bloomberg
survey of 14 economists.

“The main impact on China’s import demand is still the
macroeconomic outlook,” said David Fang, a director at the
China Coal Transport and Distribution Association in Beijing.
“Domestic coal prices may decline after September, after the
summer peak season.”

Colombia and South Africa supplied a combined 3.8 million
metric tons of coal to China in the first five months of the
year, compared with zero a year earlier, according to Chinese
customs data. The U.S. and Canada shipped 3.77 million tons in
the period, up from 1.22 million tons.

“Lower prices paid in the annual contracts will have some
impact on China’s imports,” Fang said.